George Quek leads offer to privatise BreadTalk; group in the red for Q4 and FY19

Singapore

BREADTALK Group's George Quek, his wife Katherine Lee and a substantial shareholder have launched a voluntary conditional cash offer for all the ordinary shares in BreadTalk at S$0.77 apiece, with a view to delist the food and beverage player.

The announcement came as a surprise to some, as Mr Quek had responded "no", when BT asked him in October if there were plans to take the group private.

The offer was unveiled just minutes after the group announced late on Monday night it had sunk into the red for its fiscal fourth quarter and 2019, and is in technical breach of the financial covenants for its S$100 million notes due in 2023, according to separate filings late on Monday night.

The offeror is BTG Holding Company, a special purpose vehicle ultimately owned by Mr Quek, who is BreadTalk's founder and chairman; Ms Lee, who is BreadTalk's deputy chairman and executive director; as well as Minor International, a Thai-listed hospitality company. Minor International owns 99.7 per cent of The Minor Food Group, which in turn wholly owns Primacy Investments, a substantial shareholder of BreadTalk.

The offer price of S$0.77 per share represents a premium of about 19.4 per cent over the closing price of S$0.645 on Feb 21, and a 30.1 per cent premium over the one-month volume weighted average price.

In a regulatory filing, BreadTalk said the offer is an attractive opportunity for shareholders to exit their investment in the shares at a premium. The offeror believes that privatising BreadTalk will give the company more operational flexibility, and savings on listing costs, since there is no need for it to tap on capital markets.

The offer is conditional upon valid acceptances that will result in the offeror and its concert parties holding more than 90 per cent of the shares in issue, though the offeror reserves the right to reduce this condition to more than 50 per cent.

Each of Mr Quek, Ms Lee, Square Investment (an investment vehicle jointly owned by Mr Quek and Ms Lee) and Primacy Investment (a subsidiary of Minor International) has given an irrevocable undertaking to tender all the shares they hold in acceptance of the offer. They will also reinvest the consideration due to them to subscribe for new shares in the offeror. As at Feb 24, these undertaking shareholders collectively own about 70.53 per cent of BreadTalk.

In a research note on Tuesday, DBS analysts Alfie Yeo and Andy Sim recommended that shareholders accept the cash offer of S$0.77 per share, which represents a 57 per cent premium to their 12-month target price of S$0.49 for the counter.

"Q4 earnings were below our estimate, dragged by China Bakery business and we see headwinds from Covid-19 affecting the food and beverage sector both in Singapore and China," the analysts wrote.

They added that the current offer is higher than BreadTalk's closing prices over the past eight months, and is an opportunity for existing shareholders to exit the stock at an "attractive valuation", with a price-to-earnings ratio of 33 times, based on forecasted FY2020 earnings.

Advisory firm United First Partners on Tuesday said the timing of the offer was "opportunistic", given BreadTalk's warning of a FY19 net loss on Jan 16. United First Partners noted that the offer is not final, and that BTG Holding's offer has "scope for an increase".

Before the offer was announced, BreadTalk on Monday night reported a net loss of S$8.1 million for the three months ended Dec 31, 2019, versus a net profit of S$8.9 million a year earlier. This translated to a loss per share of 1.44 Singapore cents for Q4, compared with an earnings per share of 1.58 Singapore cents in the year-ago period. Revenue rose 10.1 per cent to S$170.4 million for the quarter, from S$154.8 million in Q4 2018.

For the full year, the group posted a net loss of S$5.2 million, versus a net profit of S$15.2 million a year ago. This was mainly attributable to S$6.1 million in one-off fixed-assets impairment, due to premature outlet closures, inventory obsolescence, and franchise income doubtful debt provisions.

Also dragging BreadTalk's FY2019 performance were the widening losses at the bakery business in China and Thailand, widening losses across several brands due to "challenging operating environments", and a "significant deterioration" in the financial performance of the Hong Kong bakery and food atrium businesses due to the social unrest in that region, the company said.

In a separate filing on Monday, BreadTalk disclosed that there has been a technical breach of financial covenants for its S$100 million 4 per cent notes which are maturing in 2023. This constitutes an event of default, the company said.

The technical breach was due to a 44.6 per cent decrease in accumulated profits for FY19 compared to a year ago, in view of the group's net loss for the period and a shift in accounting policy. Nonetheless, BreadTalk said the technical breach is "not indicative of any cash flow impact to the group". The company is still expected to be able to pay interest on the notes as and when such interest payments come due. BreadTalk is now consulting with advisers and plans to engage the note holders in the coming weeks.

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